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Continued from page 4

The Future

It should come as no surprise, then, that I am not here today to praise FINRA but to bury it.

I don’t hate FINRA. I hate what it has become because I know what it can be.

But let’s not reinvent history simply to bolster my thesis. Few things in life are unblemished. No regulator or business should aspire to sainthood – it is not a practical business plan. FINRA’s predecessor, the old NASD, was not without its faults. It was the soil from which pennystock hucksters grew and from which the price-fixing of NASDAQ by the market making community was nurtured. And many of the complaints that I raise about biased regulators and ineffective regulations are always raised by regulated entities and have been raised not merely for years or decades but for generations.

So, no, let’s not pretend that when FINRA was the smaller NASD it was better –NASD had its faults, some of which were severe. And let’s not pretend that somehow being small automatically imbues a member firm with decency and compliant behavior, it does not.

For all its warts, the old NASD, offered an alternative to the stodgy New York Stock Exchange. In the old NASD community we had the vibrancy of NASDAQ rather than the increasingly outdated specialist system of the antiquated Floor. The old NASD community was driven by smaller firms with a vision and more oriented to the retail investor than their NYSE counterparts. Notably, the old NASD was built on District Offices and District Committees planted in regions around the country; whereas, NYSE remained a monolithic presence literally on Wall Street.

But that was then and this is now – and now, we must deal with the fact that NASD was hijacked by regulators and members not interested in offering an alternative to the New York Stock Exchange but in seeking to emulate it. In the end, the NYSE is a wasting asset that failed to adapt to the new realities of the marketplace and is in danger of becoming increasingly irrelevant. And that is what FINRA chose as its model. And that is why we are falling down the same slippery slope.

A SOLUTION: DIVIDE AND CONQUER

I propose that FINRA be dissolved as it is presently constituted and that we replace this unwieldy bureaucracy with three new broker-dealer self-regulatory organizations:

• one for firms with up to 150 registered persons;

• one for firms with between 151 and 499 registered persons, and

• one for firms with 500 or more registered persons.

I submit that three autonomous SROs with their own Boards, their own staffs, their own members, and their own rules is a quick, easy, and effective first-step in fixing the broken regulatory regime on Wall Street. Overnight, we could end the age of one-size-fits-all regulation. Simply breaking up FINRA into its three constituencies would get us back to neighborhood policing and permit each of FINRA's three broker-dealer segments to create rule books tailored to their needs and the realities of their business.

Restoring trust and confidence in the fairness of our industry’s regulation would likely rebuild the fractured partnership between the regulated and the regulator. It would eliminate the internecine warfare inherent in this glorified trade organization of FINRA that regulates three differently sized faction according to rules that are too often premised upon a zero-sum game. As presently structured, FINRA regulates in a manner that results in what is good for large firms is bad for small ones, and vice versa. You got round and square pegs but only round holes – and that’s stripping a lot of edges off small firms when FINRA tries to pound you into one-size-fits-all regulation.

2006 Job Opening

How did we arrive at our present predicament with a broken regulatory partnership and a patronizing self-regulatory organization? We stand here today trying to deal with the mess that is FINRA because of decisions made a few years ago – and that five or ten years from now, we will be deeper into the muck because of decisions that FINRA makes today and that you failed to correct.

By way of example, let me turn the clock back about five years to a September 15, 2006, when NASD posted a job on its Career Opportunities website. More than anything, this posting typifies how we got into this mess. The September 2006 job opening was for a Director of the NASD’s new Office of Member Relations. What I want you to focus on is the nature of the job duties. So as to not be accused of making up some of the tortured language in that notice, let me quote directly from the job posting :

Major Purpose of Job: The Director, Member Relations, assists the Vice President of Member Relations with all aspects of the department’s operations. . .

As with all bureaucracies, we start off with the simple premise that the more titles there are in a department, the more important the department sounds. So in the heady days of 2006, NASD was advertising for a Director of Member Relations whose job involved assisting NASD’s Vice President of Member Relations. And we all know how this cascades out of control. The Director soon needs a Deputy Director, and that leads to an Assistant Deputy Director, who needs a Deputy Assistant Director, and, of course, once you get to that point, you absolutely must hire an Assistant Director to the Deputy Assistant Director. Of course, when you call any of these folks you get voicemail telling you to press 1 to continue in English.

Further on in the job posting, NASD explains that among the operations that this new Director of Member Relations will perform is to:

God Bless Washingont, DC and all that bureaucracies and little bureaucrats it has spawned. When I see prose such “facilitate effective feedback loops,” I immediately know what’s going on. Someone is desperate to make a simple task sound very important and complicated.

For godsakes, who the hell talks like that? Certainly no one who has run a small broker-dealer on a daily basis speaks like that. Feedback loops – fruitloops, what’s the difference and why are we even hiring someone at your expense to perform such a job? Speaking of performing that job, here’s another nugget from that 2006 NASD Job Posting:

Essential Job Functions: The Director serves as ambassador to member firms. . .

An ambassador? Okay, so even five years ago our self regulator grudgingly admitted that it viewed its members as foreign entities --- not really partners in self-regulation. Of course, I thought that in diplomatic relations, countries exchanged Ambassadors. Where is the ambassador from the small firm community in all of this? And there’s more. The NASD Job Notice stated that among the tasks for this new job would be:

• Key message development, including identification of key themes to deliver as well as general talking points for NASD senior management . . .

How nice. This newfangled ambassador would be hired to also focus on identifying “key themes” to deliver. I’m not exactly sure where they were proposing to deliver these key themes but, hey, I’m cranky to begin with. Look, we all know why NASD wanted to hire this Director and why FINRA continues to fill such silly positions. They wanted this Director to be the NASD’s snowblower. And the snow job is to give you in the small firm community the touchy-feely impression that someone’s listening, someone cares, and someone is working behind the scenes to implement changes in your favor. Yeah, right.

FINRA still doesn’t get it. We in the small firm community are not children or idiots. We can see through FINRA’s spin and doubletalk. Not only did NASD publish this nonsense of a job opening – for all to read – but they clearly didn’t realize or care how insulting it was. I mean, seriously, is senior management at our industry’s self-regulator so out of touch with the members it regulates that NASD needed to hire someone to generate “general talking points for NASD senior management?” Senior executives at NASD and now FINRA can’t figure out what’s appropriate to discuss when addressing industry groups? Hey, anyone ever hear of old-fashioned sincerity? Finally, there’s this nonsense:

Other Responsibilities: The Director is also responsible for: • Preparing, reviewing, monitoring, and providing guidance on written communications to members, including messaging priorities, tone, and delivery mechanism. • Oversight of tone and messaging delivered at standing and district committee meetings. . .

Did NASD really need to hire an executive to worry about messaging priorities, tone, and delivery mechanism?

Worse, the Director will also have “oversight of tone and messaging delivered at standing and district committee meetings. . .” Funny, I just can’t find any reference to developing “sincere content” or to timely responding to complaints from the industry. I also note that despite this job being for the Director of a member relations department, there is nary a word about delivering messages from the industry to NASD. Frankly, that was the legacy and remains the inheritance of FINRA. Why does that matter? Because past is prologue, and this bureaucratic mind-set is what has brought us to the brink of disaster in 2011 and, if not reversed, will take us over the edge. If you're going to get rid of the weeds on your lawn, you have to pull them out by the roots.